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04/18/05 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts: MACR (closed it on the ADBE buy)
Buy alerts: MSCC
Trailing stop alerts: AYE (reversed right back)
Stop alerts: None issued
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. To subscribe to the Daily alert service you can sign up at the following link:
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SUMMARY:
- Modest rebound as stocks respond to last weeks selling.
- PPI, CPI will dominate week's economic data.
- Volume remains solid as stocks try to bounce and find a catalyst, but remain very weak.
- TXN reports and is up after hours, propelling techs generally higher.
- Better earnings versus PPI/CPI
Muted bounce temporarily stems the bleeding.
The best thing you can say about Monday is that the market did not crash. That was not really a concern, however, so the in truth the best thing you can say is that stocks bounced back some and kept some solid volume doing it. It was not much of a move as the indices were ready to give up the gains three times intraday. Volatile but in a narrow range as investors, even after the tail kicking of last week, still were not ready to let stocks rebound in peace. This halting, up and down action even on a rebound move is indicative that the buyers and sellers are still taking shots at each other though it is clear that the sellers have been and remain in charge.
Some merger and acquisition news (GME/ELBO, ADBE/MACR) helped spark some recovery in the futures after a 4% plunge on the Nikkei set a negative tone to start the week. The market needed it because it was still a struggle to make any upside headway. SP500 tried three times to come within spitting distance of the 200 day SMA, but it never really challenged that level, falling back when it came within 3 to 4 points of that level. Breadth was questionable with a small cap recovery bolstering NYSE breadth to 1.5:1; NASDAQ recovered just above flat.
In the end the market posted a gain sans DJ30 (weighed down by MMM and its weaker outlook), closing near mid-range for the session with 0.9% (SP600) to 0.2% (NASD) gains. Compared to the prior selling that is a drop in the bucket. There was no character change. Indeed, the bounce did not even do much to set up the next downside move. If this is going to mean anything it will have to put together a week or two of upside, then another drop to test these recent levels. That sets up the most likely of the potential upside patterns from here, i.e. the double bottom. One modest days bounce, however, is way too early to talk about bottoms. The TXN earnings may perk stocks up once more, but that is just part of the recovery process and is still a long way from bottoming.
THE ECONOMY
PPI and CPI receive further scrutiny given Fed's inflation view.
Prices have been watched for the past year, and they have shown inflation. A demand led recovery and pensive producers have maintained steady pressure, pushing prices higher ahead of them. The last CPE (consumer price expenditure) measure came in at 1.7%, indicating that is the real inflation rate. That is the target the Fed has for this indicator, and that means the Fed had reached its limit regarding allowing further price increases in Q1. Now we don't agree with the Fed's 'targets' with respect to growth and inflation; set the policies and let things work. As long as they don't show inflation, as long as supply is strong, let things work.
Unfortunately the Fed does see some inflation. It is not the only one; prices are rising, something that started last year as we noted on many occasions. Big screen televisions, computers, and printers are cheaper, but you don't buy these and eat them every week. Nor do they take them as payment at school, the doctor's office, or the hospital, places where we would love to enjoy the same price deflation as electronics.
The fact that there is real inflation and not just some conjured discussion of new inflation indicators as in 1999 has the market rattled. Not necessarily the inflation, but the fact that the Fed is aware of it and is engaged in fighting it even as higher energy prices are putting the brakes on the economy. The market has reacted with a health dose of disrespect for the Fed's abilities at corralling modest inflation and not killing the patient at the same time.
If the PPI pulls another January spike the market will shudder. It backed off with the February drop, but then CPI was sharply higher that month. You could say that the January producer price increases finally filtered into the CPI in February. The market is thus hanging on the news to glean some further information as to what the Fed intends to do with rate hikes.
No one really anticipates the Fed will stop its rate hiking. It certainly has said nothing to indicate that is the path it is taking. Its debate of late has been whether to maintain the pace at 25 BP or take it up a notch to 50 BP. No one really anticipates the Fed to raise by 50 BP, at least not with the latest market dive lower and some moderating economic data. The Fed does intend to continue hiking. The ONLY thing the moderating economic data has done is keep the Fed at 25 BP. It has said more than once that but for its rate hikes thus far inflation would be out of hand. Unless there is major slowing in the economy the Fed won't pause, back off or otherwise do the right thing. We have said it before: the Fed gets a notion as to where rates ought to be, and it moves to that level with all deliberation . . . unless . . . there is a major shift in the economy. Even then the Fed will take too long to not only stop its current action but to reverse course and apply any need stimulus.
We anticipate the CPI will continue to show the same pricing pressure as it has, and that will allow the Fed to continue hiking rates, just as it wants to do, even if energy remains high and economic signals continue to slow. Despite all of its talk about looking at the economic data as it comes in, the Fed has demonstrated time and again that it is quite inflexible once it starts a policy shift. We continue to hear the same 'have to raise rates to keep things under control' language in each speech. It has a target in mind (at least 3.5%) and it wants to get there any way it can.
THE MARKET
A tentative rebound at best though stocks held their modest gains and posted some solid post-expiration volume. Trade was not bad at all, and you would expect it to be lighter after an expiration Friday that was the third in a nasty dive lower. NYSE volume was solid, NASDAQ was just above average, both, however, were still below Thursday levels, the day prior to expiration when the market was still in the dive lower. Thus while volume was still decent it was not as strong as the selling in this down leg. Not surprising, but it helps to put it in perspective so we don't accord the move more strength than it had.
It is likely most investors were not doing that. The price moves were modest, and as noted, it was a struggle just to hang onto them as stocks bounced up and down all session. The market was feeling around in the dark after a pretty harsh throttling, and it was not about to run any sprints to the upside. It managed to close positive, but that was just a look around similar the hedgehog coming out of his den to get a look at the weather.
Indeed, any rebound from here will typically require a test of the lows on this leg down. You rarely get a knifepoint turn that does not come back to test unless there is some powerful catalyst, say the Fed issuing a mea culpa, a Roseanne Rosanna Dana 'never mind' of sorts. Given that has the likelihood of Michael Jordan coming out of retirement (maybe worse odds than that), we don't expect any continuing bounce from here to rally stocks on out of this break lower. The best action for an ultimate upside resolution would be a rebound for a couple of weeks that takes its time, fails roughly near the early April highs, then tests the move and rebounds off of that. That still requires a significant amount of work ahead.
MARKET SENTIMENT
Sentiment backed off from the higher levels hit last week as the market sold hard, not unexpected. It is hard to maintain that high level though we would have preferred to see another meltdown that really sent the indicators spiking off the charts. As it is, stocks rebounded, some of the oversold pressure was relieved, and little was accomplices as the upside bounce was quite modest.
VIX: 16.56; -1.18
VXN: 21.38; -0.47
VXO: 16.12; -0.53
Put/Call Ratio (CBOE): 0.99; -0.43.
NASDAQ
Tech stocks rebounded on lower, average volume, giving back half of their move for the session.
Stats: +4.77 points (+0.25%) to close at 1912.92
Volume: 1.896B (-20.46%). Volume was still above average, but it was well off the Friday and even the Thursday level. Thursday is a more accurate gauge as that was not expiration. It shows that sellers remain stronger than the Monday buyers.
Up Volume: 1.088B (+785M)
Down Volume: 785M (-1.266B). Still quite even despite the upside move, underscoring how modest the buyers were.
A/D and Hi/Lo: Decliners led 1.03 to 1. Decliners led on an upside session. Even with the small caps leading the overall market, techs were very indecisive still.
Previous Session: Decliners led 3.18 to 1
New Highs: 25 (+6)
New Lows: 221 (-46)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Very modest rebound, finishing the session in mid-range for the day. Not much of a snapback following the drubbing, basically only relieving some of the oversold pressure that built up during the selling. Technically the pattern is in disarray, but it did hold support from September and October 2004. After such a drop it has to rebuild, and a rebound to fill the Friday gap lower up toward 1946 is a first move. Again, a move up toward the 50 day EMA at 2016 would be an ideal set up for a test of this last drop, but we have to wait and see if techs can get some earnings to provide some lift. TXN may start to do that, but its work is cut out.
The large cap techs struggled a bit more than the overall index (+0.1%), but hardly noticeable. They too face filling the Friday gap lower back up to 1441 and fighting to regain ground toward the April high near 1500. Monday was the first attempt at what will be quite a comeback grind.
SOX had one of the better upside sessions with its 0.8% gain, just behind the small caps. They bounced from the January low (383); having fallen this far, that was the logical place to do it. Lots of overhead resistance starting at 400 and then the 200 day SMA (410) that coincides with a pretty solid price band.
SP500/NYSE
SP500 posted a modest gain on continued above average volume, but still is below its 200 day SMA, never really challenging it.
Stats: +3.36 points (+0.29%) to close at 1145.98
NYSE Volume: 1.75B (-21.65%). Volume fell way off pace, but it was a solid, above average volume session. AS with NASDAQ, however, volume was still below the Thursday selling volume; what buying/short covering there was failed to top the recent selling strength.
Up Volume: 1.292B (+854M)
Down Volume: 863M (+863.002M)
A/D and Hi/Lo: Advancers led 1.43 to 1. The small caps led the session and bolstered the upside breadth. Better than NASDAQ, but pretty modest nonetheless.
Previous Session: Decliners led 3.24 to 1
New Highs: 10 (-7)
New Lows: 138 (-49)
The Chart: http://www.investmenthouse.com/cd/^spx.html
After breaking their 200 day SMA (1153) Friday, large caps posted a modest gain on continued above average volume. In doing so they held the June and October 2004 peaks and generally a range of support that started near 1150 and runs to 1125. This is a very good point for SP500 to make a stand and try to rebuild, though as noted over the weekend, it could test the bottom of the range near 1125 as well. A very steep drop that will take some rebuilding. The first test for the index is the 200 day SMA, and it could well fail that test and drop further in this range of support before it is ready to try a two week or so rebound to recover some lost ground and set up another drop as the shakeout on this down leg.
SP600 led the market with its 0.9% gain, and it managed to recapture the 200 day SMA (305) immediately with this rebound. There is some serious resistance at 310 though that level did not slow the index on its way lower. Of course the selling was strong and the upside buying is much more tepid; thus this 310 level will come into play on a further move higher. Very much the same as SP500, the small caps have a lot of resistance to deal with as they start their fight back up.
It is worth noting that the mid-caps did not breach their 200 day SMA on the recent selling, checking up above that level (621) and cracking back through 630 where there was some support. Maybe they will be the leaders, but their pattern resembles the other NYSE indices with their straight plunge down last week.
DJ30
Every session there is some story stock on DJ30 that directs its action, and Monday that was MMM. It disappointed with its guidance and that sent that stock lower on volume, taking DJ30 lower. It would have enjoyed a massive 20 point gain without MMM, but the point is the move would not have been great anyway, and MMM is a major company and you simply cannot discount its impact on the market. The Dow came within 21 points of 10,000, where it found bottom in March 2004. A good psychological point to bounce some, but hardly a sign of strength after it too broke down from a modest bounce above the 200 day SMA.
Stats: -16.26 points (-0.16%) to close at 10071.25
Volume: 301 million shares Monday versus 417 million shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
After a harsh downside week stocks may find a catalyst to build on the modest Monday bounce. After hours TXN pleased investors with its earnings, indicating that the inventory hangover that built up at the end of 2004 was largely gone. That put some pep back into chip stocks and tech stocks in general after the bell. After getting kicked around on fears of a slowing economy, stocks may have found their near term catalyst to start trying to rebuild and make that first move off the bottom. Will need to see if the news has staying power greater than the half life of a dog's attention span, but after such a beating we can afford to watch and see how it responds. If INTC and other techs can provide good news SP500 may be able to break back above the 200 day SMA, holding this key support level.
PPI is out before the open as well, and that will have its impact if nothing more than a lead in to the CPI. At this juncture, however, it is clear that some producer prices are passing onto the consumer, so any unexpected escalation would be hard for the market as it would confirm the rising inflation picture in what is looking like a slowing economy. That is far from stagflation, but that is the same idea, something we discussed at early this year as we reviewed the possibilities for 2005. Slow growth, rising inflation, rising energy costs. Even if this comes to pass it is still a microcosm of the 1970's, but that does not make it a good thing.
PPI can do battle with TXN and other earnings reports to see who is the stronger near term. In the meantime we will be watching how the bounce back, if it can continue, shapes up. We want enough upside to better set up more downside action; the Monday bounce hardly did that after the sharp downside run through the Friday close. That second leg lower can be quite sharp as it tests the first leg, and we want to see a good set up that leads into that. If it does set up properly we should see that roughly two week rally up to the prior resistance points. It may not start just yet as Monday may have been just a trial run. When we do see it make the move we will have to be patient, let stocks make their tests, and then let them start slipping lower from key resistance.
We still see many leaders that have not given up their patterns. That can be a contrarian indication, however, because not everything has been taken out and shot, thus clearing the way for upside. That remains to be seen as well. We won't turn away, however, from a leadership stock that has made a good pullback and is rebounding on solid trade. If the leaders refuse to break down and rebound on solid trade there may not be any further selling. We will prepare for either scenario and will thus recognize and be ready to take advantage of either.
Support and Resistance
NASDAQ: Closed at 1912.92
Resistance:
1946 is the recent cap down point.
1950 (top of October to December 2003 consolidation)
1954 from October as well.
Late 2003 highs from 1960 to 1970.
Early October high at 1971.
The 200 day SMA at 1991
The 50 day EMA at 2016
The 50 day SMA at 2029
2050-54, prior resistance and the June high is stronger
Support:
1900 from October 2004, March 2004, October to December 2003 (consolidation range bottom)
1876 from the May 2004 low and November 2003 low.
1860 from the late September 2004 low.
S&P 500: Closed at 1145.98
Resistance:
The 200 day SMA at 1153
1154-1157 tops from early 2004.
1163 is from January is trying to hold.
1175 second high in that double top that spanned late 2001 and early 2002 is trying to hold
March 2003 up trendline at 1187
The 50 day EMA at 1184
The 50 day SMA at 1192
1196, the mid-January high and the early December peak in the left shoulder.
1200
Support:
1145 to 1142 from March and October 2004
1129 to 1125
1100 to 1095
Dow: Closed at 10,071.25
Resistance:
Some price resistance at 10,250.
The 200 day SMA at 10,377
10,400, the bottom of the November/December range
The 50 day EMA at 10,535
Price consolidation at 10,600
10,754 is the February high
Support:
10,065 from March 2004 lows.
9988 from September 2004.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
April 19
PPI, March (08:30): 0.6% expected and 0.4% prior
Core PPI, March (08:30): 0.2% expected and 0.1% prior
Housing Starts, March (08:30): 2050K expected and 2195K prior
Building Permits, March (08:30): 2080K expected and 2107K prior
April 20
CPI, March (08:30): 0.4% expected and 0.4% prior
Core CPI, March (08:30): 0.2% expected and 0.3% prior
April 21
Initial Jobless Claims, 04/16 (08:30): 330K prior
Leading Economic Indicators, March (10:00): -0.3% expected and 0.1% prior
Philadelphia Fed, April (12:00): 16.0 expected and 11.4 prior
End part 1 of 3
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